BBC NEWS Americas Africa Europe Middle East South Asia Asia Pacific Arabic Spanish Russian Chinese Welsh

 You are in: Business
Front Page 
UK Politics 
Market Data 
Your Money 
Business Basics 
Talking Point 
In Depth 

Commonwealth Games 2002

BBC Sport

BBC Weather

Monday, 22 October, 2001, 15:47 GMT 16:47 UK
India rates hit lowest level since 1970s
Indian shops
The rate cut is designed to boost the economy
By the BBC's Sanjeev Srivastava in Bombay

Interest rates in India have slid to their lowest rate for almost 30 years after the country's central bank - Reserve Bank of India (RBI) - cut interest rates by half a percentage point.

In a country where interest rates have been traditionally high, the last three years have seen interest rates fall by a dramatic 3.5 percentage points to 6.5%.

This is the lowest interest rate since May 1973.

Announcing the six monthly review of India's monetary and credit policy for the current financial year, reserve bank governor Dr Bimal Jalan also announced a two percentage point cut in the cash reserve ratio (CRR) to 5.5%.

CRR is the minimum cash holding an Indian bank is required to maintain and the limit is prescribed by the RBI.

Overall we expect India to have one of the highest rates of growth in the world

Dr. Bimal Jalan, RBI governor

The Reserve Bank governor also restated a forecast of 5-6% in India's economic growth, or GDP, in the current financial year.

"On the GDP front, the services sector seems to be doing alright and we also expect the agriculture growth to be quite promising because the distribution of rainfall has been quite good this year," Dr Jalan said.

"Overall we expect India to have one of the highest rates of growth in the world."

The bank was also pleased with a drop in inflation to 3.2%, from 7.4% a year ago and a rise of nearly $15bn in foreign exchange reserves to $45bn.

Sluggish performance

However, continued sluggishness in industrial and export sectors remained a cause of concern, Dr Jalan said.

According to Dr Jalan, the interest rate cut and the lowering of CRR ratio should inject financial liquidity and help trigger industrial recovery.

According to initial estimates the lowering of CRR alone should free an additional $1.8bn for possible loan disbursement.

Too little?

The measures would make the "monetary and credit environment... positive for growth and positive for industrial recovery", Dr Jalan told journalists soon after announcing the mid-term review of monetary and credit policy.

Shares of nationalised banks, including the State Bank of India, country's largest state owned bank, surged in afternoon trades on Bombay's stock exchange as analysts said the interest rate cut should boost the profitability of public sector banks.

But some observers believe the cut is too small and that it will not kickstart the economy.

"The problem is uncertainty in this post-September 11 climate. Uncertainty is holding back investment decisions," Deepak Lalawani at Astaire and Partners told BBC World Business Report.

Deepak Lalawani, Astaire and Partners
"It is uncertainty which is holding back investment decisions."
Bimal Jalan, Reserve Bank of India
"We expect the environment to be positive for industrial growth."
See also:

12 Oct 01 | Business
India targets domestic tourism
04 Oct 01 | Business
Indian economy smarts under crisis
Internet links:

The BBC is not responsible for the content of external internet sites

Links to more Business stories are at the foot of the page.

E-mail this story to a friend

Links to more Business stories